Bonds fall as Europe takes steps to curb crisis

NEW YORK: US Treasuries debt prices fell on Thursday as the European Central Bank took steps to pump more cash into the banking system in a bid to contain the euro zone debt problem, reducing safe-haven bids for bonds.

The ECB, wary of the region's fiscal woes spiraling into a global crisis, said it will revive 12-month loan operations and purchases of covered bonds, while it kept key interest rates unchanged at 1.50 percent.

Traders had expected more unconventional measures from the ECB after the Bank of England earlier on Thursday said it will expand its bond purchases by 75 billion pounds to 275 billion pounds in an attempt to avert a recession.

"That's why we got hit. These steps put a little hope in the market that they are doing something to deal with the problem," said Thomas Roth, executive director of US government bond trading at Mitsubishi UFJ Securities USA in New York.

Government data showing a smaller-than-expected rise in jobless claims last week also exerted downward pressure on the bond market for a third day in a row.

The US Labor Department said filings for first-time jobless benefits totaled 401,000 in the week ended Oct 1, fewer than the 410,000 predicted by economists polled by Reuters. However, it was an increase from the prior week's upwardly revised 395,000.

The jobless claims precede the government's closely watched monthly payrolls report on Friday at 8:30 a.m. (1230 GMT).

On the supply front, the Treasury Department is set to announce at 11 a.m. (1500 GMT) the details of next week's auctions of three-year, 10-year and 30-year debt. Most analysts expect a combined amount of $66 billion, matching the amount sold in September.

At the same time, the Federal Reserve will hold the first sale of Treasuries it owns as a part of Operation Twist -- the $400 billion bond program it started this week to extend the maturity of its Treasuries portfolio. The goal is intended to lower mortgage rates and other long-term borrowing costs in order to stimulate borrowing.

It plans to sell $8 billion to $9 billion worth of Treasury bills due in Jan. 2012 to July 2012.

In early trading, the 30-year bond was down 30/32 in price, yielding 2.90 percent, up about 5 basis points from late Wednesday.

Benchmark 10-year notes were down 14/32 in price for a yield of 1.94 percent, up 5 basis points from Wednesday.

As the longer-dated debt lagged shorter-dated issues, the yield curve steepened to 1.68 percent from 1.51 percent earlier this week, which was the flattest level since January 2009.

In the wake of the ECB's latest policy moves, US Treasuries trailed German Bunds. The 10-year US note yield moved to a near 7 basis point premium above 10-year Bunds, up from a 5 basis point spread on Wednesday.

Copyright Reuters, 2011